Why Many Multifamily Investors Are "Going to Plan B" by Investing in Class B Properties
With caveats for lending attached to building Class B multifamily properties, and with the majority of new inventory delivered being Class A, finding a quality Class B property and employing a value-add strategy can be the best path for real estate investors. A recent piece in Multi-HousingNews (MHN) online looked at some reasons why investing in, and rehabbing, Class B properties just makes the most sense. We also investigate why Class B can be your "plan B."
According to the article on MHN, there are multiple reasons that investors have sought Class B opportunities, but security is among those. Unlike Class A properties which have an initial higher price tag as well as higher rent, Class B properties cost less upon investment and are more “recession-proof.” For investors, seeking out the property that has a better ROI and also provides greater security regardless of whatever is happening in the current economy simply makes good financial sense. The demand for this type of property has also increased, making it more popular among renters and investors alike. Since home ownership has seen steady competition from the rental market ever since the Great Recession, it may come as no real surprise that Class B properties are some of the most coveted. They're more affordable and attainable for those turning to renting instead of a mortgage than their higher-end counterparts. By looking toward value-add Class B properties, investors can help guarantee a solid stream of rent via a group that is looking for practicality vs a luxury price.
Another article we found on Amrock.com noted that over 96% of Houston, TX area developers were focusing on building Class A properties. According to that piece, the limitations put on funding to develop Class B properties, as well as land prices, higher labor costs, etc helped demand that developers build these higher-end apartments in order to see profits. The conclusion of the article was that there might well be an affordable-housing crunch in the Houston area. Since much of the new inventory nation-wide will be Class A properties, many parts of the country may face similar problems, and see a demand for Class B and C properties spike. For investors, holding out for value-add Class B properties can keep you ahead of the game. As noted in the MHN piece, by making fiscally-responsible improvements to Class B investments, like upgrading appliances, kitchen and bathroom counters, creating pet-friendly space, adding package-delivery lockers and other conveniences – all of these are relatively cost-effective ways to dramatically improve the property and your investment. You won't be paying for a Class A property but you can offer many impressive amenities in an apartment class which is in high demand.
As we see the demand for apartments increase, and specifically the demand for more affordable apartments, investing in a Class B property that can be improved and upgraded to appeal to renters is ideal for many investors. Investors can create the Class A feel without both experiencing or passing on the Class A prices; with the increased demand and lack of new Class B inventory, finding and creating the right property can be a highly successful and lucrative proposition.